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Apple’s Financials: Meeting Inflated Expectations

On the eve of the release of Apple’s fourth quarter financials, the stock price had been drifting, perhaps because some analysts thought the iPad mini was too expensive. How can Apple dare charge $329 for a product that was in the same category — at least according to their perceptions — as a $199 Amazon Kindle Fire or Google Nexus 7?

Now when it comes to Apple’s revenue, this had to be a nail biter. Microsoft is growing, but not as fast. Wall Street was naturally concerned when Google didn’t earn quite as much as they expected. So that left Apple, where questions were raised about Mac sales in a declining PC market, and how many copies of the iPhone 5 were moved in the September quarter.

Well, when the financials were released, Apple’s stock price tumbled, but you may wonder why. Quarterly revenue, at $36 billion, was a tad above Wall Street expectations, and net profits of $8.2 billion, or $8.67 per diluted share, was a tad below. All in all, it would seem to be a wash, except for one thing. Apple reported selling 14 million iPads. While that was a 26% unit increase over last year, it was still below analyst expectations of 15 million.

So has iPad ardor cooled, or is it just the consequence of being unable to predict trends and sales in what’s still a relatively new product category?

During the quarterly conference call with financial analysts, CEO Tim Cook attributed a seasonal reduction in iPad sales, at least compared to the last quarter, on the fact that K-12 educational buyers usually make their purchases in the June quarter. He didn’t suggest that anticipation of an iPad mini might have also put some potential customers on the sidelines.

That takes us to the current quarter with a fourth generation iPad and the iPad mini fleshing out the product lineup. It could be a blowout, and Wall Street will quickly forget the fact that their estimates, which usually have little basis in fact anyway, weren’t met.

As you recall, in the last quarter, iPhone sales were subpar, and Apple’s stock price took a hit for a while. On that occasion, Apple did attribute the perceived shortfall to anticipation of an iPhone 5.

When it comes to iPad mini pricing, there’s a published report that Apple is paying a premium for the GF2 touchscreen modules used on the smaller tablet, estimated at roughly $5 less than the comparable part on the full-sized iPad. So maybe prices will be reduced once production becomes more efficient, and component cost is reduced to a more reasonable rate. Or maybe not, if the iPad mini becomes the hot ticket for the holiday season.

Surprisingly, Apple still throws cold water on the prospects for 7-inch tablets, with Cook saying, “We don’t think they’re good products, and we would never make one.” Clearly Apple places the 7.9-inch iPad mini in a very different category.

Cook also had some pithy comments to make about the Microsoft Surface. Labeling it a “fairly compromised, confusing product,” Cook remarked, “You could design a car that flies and floats, but I don’t think it would do all of those things very well.”

With the launch of the iPhone 5 near the end of the September quarter, a total of 26.9 million units were sold of all models. This figure represents a unit growth of 58% compared to last year. Demand continues to exceed supply. So Apple has nothing to apologize for, although the backlog could hurt total sales for a while, amid reports that the iPhone 5 is really difficult to build, but that’s nothing new for Apple.

When it comes to the Mac, Apple actually did better than estimates and, in fact, surveys of U.S. sales, where fewer Macs were allegedly sold. According to Apple, Mac sales totaled 4.9 million. Note-books occupied 80% of sales, though that breakdown is apt to change somewhat with the arrival of the new Mac mini and, later this year, ultra-thin iMacs. In all, Mac sales grew, but only by one percent. But PC sales were down 8%, as PC OEMs and Microsoft hope and pray that the arrival of Windows 8 will change things for the better. All this comes despite the fact that reviews of Windows 8 are far less favorable than I’ve seen for any previous Microsoft OS.

For this quarter, Apple is expecting revenue of $52 billion, with earnings per share of $11.75. But if any individual product appears to miss estimates, you can bet that Wall Street will freak.

Despite giving out dividends to stockholders, Apple’s cash hoard continues to soar. At the end of the September quarter, Apple had $121.4 billion in cash on hand, up from $117.2 billion the previous quarter. Despite this largesse, I do not expect Apple to be making any huge acquisitions anytime soon, even for Twitter or, if failure looms, Microsoft.

Those of you who want to go deep and dirty into the raw figures can get the rest of the information from Apple’s site.